26 March 2007
The recent decision of the English High Court in the case of Cunningham and others v Collet and Farmer demonstrates that liabilities in negligence can arise where consultants advise their client to use a letter of intent before the essential terms of a contract have been agreed by the employer and the contractor.
The case of Cunningham and others v Collet and Farmer was both factually and procedurally complex. For the purposes of this update, suffice it to say that the proceedings concerned refurbishment works to a Grade II listed country house which went dreadfully wrong. The Plaintiffs commenced proceedings against the Defendants (who were the project architects) alleging breach of contract and/or negligence for, amongst other things, advising the Plaintiff to enter into a letter of intent with the Contractor before the detailed provisions of the contract had been agreed in order that works could proceed.
The Plaintiffs alleged that the letter of intent was prematurely entered into because the price of the Works had not been agreed and a structural engineer had not been appointed to finalise certain aspects of the design. It was also alleged that the architect had been negligent in failing to advise the Plaintiffs of the risks of entering into the letter of intent in such circumstances.
In his judgment, Judge Coulson Q.C. indicated that letters of intent were too often used in the construction industry as a way of avoiding or putting off potentially difficult questions such as the final make up of the contract and the contract documents. He stated that sometimes they are used "in the hope that, once the work is underway, potentially difficult contract issues will somehow resolve themselves". The Judge stated that the use of letters of intent in such circumstances was plainly inappropriate.
Judge Coulson Q.C. went on to say that the use of letters of intent would only be appropriate if four conditions could be satisfied, namely:
(i) the contract workscope and the price are either agreed or there is a clear mechanism in place for them to be agreed subsequently;
(ii) the contract terms are (or are very likely to be) agreed;
(iii) the start and finish dates and the contract programme are broadly agreed; and
(iv) there are good reasons to start work in advance of the finalisation of all of the contract documents.
In such circumstances the Judge indicated that a "careful" letter of intent can be appropriate.
He stressed, however, that if the parties enter into a letter of intent, there is a clear risk that agreement will not be possible on all matters necessary to give rise to a full contract. It is therefore essential that a letter of intent should, by careful drafting, minimise the risk to both sides if no contract eventuates.
In relation to the conduct of the architects in the Cunningham case, the Judge indicated that if the architects believed that a letter of intent was premature and involved unnecessary risk to the employer, then the architect would have a duty to advise the employer accordingly.
The Judge, however, held that all of the matters which were outstanding at the time that the letter of intent was entered into by the parties were reasonably considered by the architects to be straightforward matters that could probably be resolved without too much difficulty. In such circumstances, it was held that the use of a letter of intent was not premature and that the architects had not been negligent in failing to advise the Plaintiff of the risks of proceeding by the use of such a letter.
The Judgment in Cunningham and others v Collet and Farmer demonstrates that consultants must give careful consideration to whether it is appropriate for their clients to enter into a letter of intent and, in particular, whether the four criteria specified by Judge Coulson Q.C. have been satisfied. Consultants have a clear duty to advise their clients if they believe that the use of a letter of intent is premature and of the risks of entering into such a document in circumstances where critical provisions of a contract remain to be concluded.
A failure to consider these issues by consultants and to provide advice to their clients could result in liabilities in both contract and in the tort of negligence.
Letters Of Intent - Yet Another Lesson! (29 Jan 2007)
Letters Of Intent - A Potential Minefield? (6 Apr 2005)
For further information, please contact:
Name: Kevin R. Owen
Phone: +852 2843 4408
Fax: +852 2103 5078